Monday, January 09, 2012

Canone & Harvest- may rally today?

Today, all eyes will be on Canone & Harvest. Canone has announced that it has received the Federal Court's go-ahead to proceed with its purchase of 32.9% of Kian Joo Can factory Bhd (KJCF) for RM241.12mil (here) while Harvest will see its designation uplifted today (here).

The Federal Court's decision is definitely positive for Canone but it may not lead to further rally in Canone's share price as the stock had rallied before the good news was announced. On the other hand, Kianjoo's share price may drop because the chance of a bonus issue & an attractive warrant issue will be very dim, if not ruled out completely.

However, Kianjoo may rally later if a fight for control were to developed. The stake that the receiver sold to Canone may not be big enough to deter such a fight. This may explain why Canone has taken a suit to block Kianjoo's proposed bonus issue and rights issue of warrant (at only RM0.01 each). The possible logic before that move by the Sees and Canone's possible concern are intriguing.

I believe the proposed issuance of bonus shares isn't the area of concern because the bonus shares should go to the existing shareholder, Kian Joo Holdings S.B and by default to Canone since it has acquired this stake. It is the proposed warrant issue of 1-for-4 that could give rise to problem. What if Kian Joo Holdings S.B. abstained from subscribing for this warrant? Then, the Sees can swoop in and scoop up a substantial portion of the warrants. They can potentially buy up enough warrants to constitute 10-20% of the enlarged shares & warrants of Kianjoo. This warrant holding plus whatever shareholdings that the Sees has accumulated todate could match Canone's stake of 32.9% (acquired from the receiver). The fact that Canone had factored this concern in its deliberation means that the possible difference between the stake held by the Sees and itself may be as small as 10% of the enlarged shares & warrants. Without the rights issue of warrrant, the difference would be slightly more- possibly 13%. Is that enough to deter a fight for control of Kianjoo?

On Harvest, I believe we will see a rally similar to what we saw in Iris in 2006 when that stock was uplifted after a 6-week designation. Just a point to note, Iris re-tested its preceding high of RM1.40 after the upliftment of its designation but it subsequently dropped back to the low of RM0.14. For more of Iris's roller coaster ride, go here.


luckystock2 said...

Hi Alex ,
What do you think about Kwantas ? Seem like a laggard among plantation counters. PER is low but too bad dividends is also low.

CoyPond said...

Alex, you concluded in this article – “On Harvest, I believe we will see a rally similar to what we saw in Iris in 2006 when that stock was uplifted after a 6-week designation. Just a point to note, Iris re-tested its preceding high of RM1.40 after the upliftment of its designation but it subsequently dropped back to the low of RM0.14.”

I beg to differ. It’s not fair, maybe even not right, to compare HARVEST to IRIS – like comparing apples and oranges. HARVEST is fundamentally sound per BURSA’s report of 19 Dec 2011.

This may interest you. I discovered something very interesting when I was in Klang over the weekend visiting my granddaughter. I saw a project called “1Gateway” along Persiaran Raja Muda. Upon checking I discovered that this is a Sagajuta project. Wow, I hope my hunch is right! Well, if my hunch is right – wow – surely it’ll be difficult to dispute HARVEST’s strong fundamentals anymore.

The project is located in a prime area of Klang/Port Klang. I found out that it was also 90% fully booked, even before the official lunch after CNY 2012. I understand the GDV is estimated to be about RM500M.

Again, assuming my hunch is right and HARVEST is awarded this project, one can safely conclude the impact it would make to HARVEST’s value.

Let me work it out, RM500M over 3 years and a net profit margin of RM50M would give an EPS of RM0.277 based on 180M shares. This works out to an EPS of RM0.092 yearly. If you include the EPS of RM0.177 from the projects already awarded (refer 30.12.11 this Blog), you get an EPS of RM0.269, which translates to RM2.69 per share with a reasonable PE of 10.

With due respect, Alex, I’m just trying to think ahead instead of relying on historical data – at least as far as HARVEST is concerned.

HARVEST is not another IRIS in the making. It’s a gem in the making, a real gem!


Magnum said...

"HI Alex, I’ve been following the friendly exchange on Harvest between
you and CoyPond, and must thank you both because I bought some
Harvest-W shares at 81.5sen as a result. I’m now richer by 30sen per
share! Thank you Alex and CoyPond"

JY said...

I still remember Iris was awarded so many projects to supply and manufacture e-passports for Hewlett Packett, Turkey, Rapid KL Bus project, and best of all to Indonesia, a country with more than 200m population. A friend of mine even challenged me what Iris value would be if Iris profited RM1 from the 200m people.

Iris storyline was very good which consists of foreign fund buying and global projects awarded. Many amateur investors back then were so optimistic and even cursed Bursa for designating a "blue-chip in the making" company which resulted it to limit down.

I totally understand how CoyPond feels about Harvest. Another potential "blue-chip in the making", in this case mid-cap stock in the making.

Right or wrong time will tell. I don't see a point to convince CoyPond that Harvest is just another Iris. If it turns out Harvest can break its new high, then we are interrupting his way to the road of fortune. (which is possible given the small share size and its link to the top politician in the country amid the year of election) If Harvest turns out to be another Iris, then I'm sure CoyPond wouldn't mind paying the price because he'll become wiser next time.

In my humble opinion, the difference in opinion is what makes stock market so exciting and intriguing. If everyone thinks the same, there will be no market at all.

As for me, I'll stay out. Current NTA is less than 20c. Can a company with NTA of 20c with no construction experience generates eps of 27c? The certainty of the awarded contract is questionable as contracts can be revoked with small sum of penalty.

Alex Lu said...

Hi Coypond & Magnum,

Good luck in your investment.

We may have different point of view but the market will be the true determinant of the outcome of any investment. I've never insisted that my clients or my readers must subscribe to my line of thinking. You are free to contradict me & do the opposite of what I've recommended. So, it is not cynical of me to wish good luck on this trade.

Alex Lu said...

Hi Kruger,

Sometimes we are all blind-sighted by what's a good stock. The pretty of writing a blog is that you are "called out" if you write silly things. That's why I am always on my toes.

Thank you for sharing.

CoyPond said...

Dear Alex and Kruger, I understand your concerns but please allow me to continue a bit more on HARVEST by reiterating that it’s not going IRIS’ way – post designation that is – no way. I say this because:

1. Raymond Chan was reported by BURSA to have bought more shares, instead of selling. This is important as he is the key person in HARVEST now. It shows that he is serious about HARVEST and not just a fly by night kind of investor so to say. There is a dearth of serious and (really) successful owners of listed companies – in the likes of Lim Goh Tong, Lee Yan Lian, Lee Loy Seng, Lee Shin Cheng and a few others – in the KLSE. And we surely hope Raymond Chan will add his name to the list too – soon! Malaysia and certainly the investing public sorely need businessmen like the above mentioned.

2. I believe Raymond Chan will continue to increase his holding in HARVEST beyond 20%. He cannot be having less shares than Ng Swee Kiat if he intends to drive HARVEST.

3. There is an attractive rights issue with free warrants pending. The report by BURSA on 13 Jul 2011 puts the issue price of the warrants as RM0.25.

4. Also, in my last posting in your blog I calculated HARVEST’s EPS to be RM0.269, giving RM2.69 per share at a reasonable PE of 10. In this regard I was pleasantly surprised to discover OSK’s article dated 11 Jan 2012 indicating technically HARVEST may trade as high as RM2.60 (quite close to my RM2.69); the gist of which is reproduced as follows:
“Harvest’s daily chart Harvest’s share price may trade lower if it violates the immediate support level. There is no doubt that rally has resumed after the stock consolidated above the psychological RM1.00 since early December. The expansion in volume – at least compared to the past two months – coupled with the gaps, suggests the move is accompanied by firm buying interest. However, the “Doji” formed yesterday, where the close was about the same as the open, indicating the lack of upward conviction, with some degree of second guessing that was not seen in the previous rally in October. The October rally too was punctuated with gaps but the conviction in the upward move was clear as a “White” candle was formed each day. Therefore, there is a possibility that the stock may find resistance at yesterday’s high of RM1.68, near the gap low of 14 Oct. The negative bias requires a confirmation by the close below the “Doji” low of the psychological RM1.50. Liquidation can be carried out on a close below RM1.50 – with support expected at RM1.00 and the November-low of RM0.665 – and a close below RM0.665 may signal the end of the rally. The stock should trade higher if it closes above RM1.68 and it may trade as high as RM2.60, a measured move based on the October rally. Resistance is also expected at the psychological RM2.00.”

The OSK report also informed and warned that “All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned.”

I sincerely hope HARVEST succeeds and all who have invested in its shares will benefit bountifully from it, not only a big Ang Pow for CNY 2012 but for many more years as the company continues to grow profitably.


Alex Lu said...

Hi CoyPond

You have done a lot of work on Harvest. Before you immerse yourself in all the analysis, think thru the big picture. The example given in my earlier post about me engaging my umemplyed, inexperienced brother-in-law to renovate my house is still valid.

At the end of the day, I don't see why Raymond Chan chose to put everything "good" inside Harvest when he could have easily list his entire business empire on Bursa. That's the cheapest way of listing your business. To pump in your "good" assets (including contracts) into Harvest would only enrich others. I don't choose to be harsh on Harvest. I like to be convince that this is a good stock. I am just not convinced.